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American Trial Lawyers Association v. New Jersey Supreme Court

Decided: February 14, 1974.

AMERICAN TRIAL LAWYERS ASSOCIATION, NEW JERSEY BRANCH, TRIAL ATTORNEYS OF NEW JERSEY, AND TRIAL LAWYERS ASSOCIATION OF MIDDLESEX COUNTY, INDIVIDUALLY AND AS CLASS REPRESENTATIVES OF MEMBERS OF THE PLAINTIFF ORGANIZATIONS, WHICH CLASSES ARE ALSO PLAINTIFFS-RESPONDENTS,
v.
NEW JERSEY SUPREME COURT, DEFENDANT-APPELLANT



Kolovsky, Fritz and Crane. The opinion of the court was delivered by Kolovsky, P.J.A.D.

Kolovsky

[126 NJSuper Page 579] On December 21, 1971 the New Jersey Supreme Court adopted a rule, to be effective January 31, 1972, regulating "contingent fee arrangements" in tort litigation. R. 1:21-7. Plaintiffs first instituted an action in the United States District Court for the District of New Jersey attacking the validity of the rule. That action pends in that court awaiting the conclusion of these proceedings, which plaintiffs thereafter instituted, challenging the validity of the rule on state constitutional grounds. American Trial Law. Ass'n N.J. Branch v. New Jersey S. Ct., 409 U.S. 467, 93 S. Ct. 627, 34 L. Ed. 651 (1973).

The action in the state court came on for disposition before a judge of the Law Division. Plaintiffs offered no evidence in support of their multi-pronged attack on the rule, advising the court that

After due deliberation, it is our submission that we are entitled to prevail upon the record in its present posture and would, therefore, decline to offer evidence at a trial before Your Honor.

The Law Division judge ruled -- contrary to what plaintiffs contended -- that (1) the adoption of a rule regulating contingent fee arrangements is within the power granted to the Supreme Court by Article VI, section II, paragraph 3 of the Constitution of 1947, and (2) the exercise by the Supreme Court of its rule-making power "is analogous to legislation, an exercise of constitutional authority by a separate branch of government," thus rendering inapplicable to judicial review of the rule "the body of administrative law with its constitutional postulate of findings of facts grounded in a record [citations omitted] [which] has developed out of legislative delegation to agencies within the executive branch of government."

Further, the judge held that a rule adopted by the Supreme Court "is reviewable, as legislation is, to determine the test of substantive due process of law, that is, whether it is in reasonable furtherance of the public health, safety or welfare. A presumption of validity should favor it."

The trial judge acknowledged that the problem of contingent fees in tort litigation had been of concern to the Supreme Court for some 15 years before the rule was adopted. Further, the judge recognized that in the summer of 1971 the court had published a proposed rule and had solicited comments thereon from members of the Bar; that it had held a public hearing on the proposed rule on November 6, 1971, at which objections to the proposed rule were presented by representatives of the New Jersey State Bar Association, the several county bar associations, and the Trial Lawyers Association of New Jersey; and that, after considering

the objections, both oral and written, offered by members of the Bar, it had amended the rule as originally proposed and had adopted it in its present form on December 21, 1971.

Nevertheless, and despite the trial judge's purported recognition that there is a presumption that the rule is valid and reasonable, he apparently deemed of no significance plaintiffs' refusal to offer any evidence, and concluded:

Rule 1:21-7(c) establishes a 33 1/3% contingent fee on recoveries above $50,000 as unconscionable and unethical, except in special cases warranting relief under subsection (f). Contrary to such a priori determination was the prevalence of the 33 1/3% contingent fee in this State and elsewhere before its effective date. The challenged rule's interference with freedom of contract and its restriction on attorneys' incomes is without support in the record or in matters subject to judicial notice. No information as to widespread abuse or complaints is before this court, no data from which an inference may be drawn that 33 1/3% contingent fees on recoveries above $50,000 are so out of proportion to the value of attorneys' services as to be unreasonable.

Judgment is rendered holding Rule 1:21-7(c) invalid on State constitutional grounds.

This appeal is from that judgment. We reverse because we are satisfied not only that there is no merit to plaintiffs' arguments -- iterated on appeal although rejected in the trial court -- that the Supreme Court lacked power to adopt any regulation of contingent fee arrangements and that the procedures used by it in adopting the rule were improper, but also that, in the absence of any evidence that the schedule of maximum contingent fees embodied in the rule was unreasonable, the trial judge had no warrant for concluding that the rule violated the constitutional right of attorneys to freedom of contract.

The contingent fee rule, R. 1:21-7, as clarified by a directive issued by the Supreme Court on April 13, 1972, applies to all matters, whether the case is to be litigated in the state or federal courts in New Jersey, in which the client's claim for damages is based upon the alleged tortious conduct

of another, including products liability claims. It does not apply when the client is a subrogee. Nor does it "apply to 'business torts' such as fraud or conspiracy to interfere with contractual relationships." It does include "all typical negligence cases, such as auto accidents, product liability and 'slip and fall.'"

"Contingent fee arrangement" as used in the rule means an agreement for an attorney's legal services "under which compensation, contingent in whole or in part upon the successful accomplishment or disposition of the subject matter of the agreement, is to be in an amount which either is fixed or is to be determined under a formula."

Paragraph (b) of the rule provides:

An attorney shall not enter into a contingent fee arrangement without first having advised the client of the right and afforded the client an opportunity to retain him under an arrangement whereby he would be compensated on the basis of the reasonable value of his services.

Paragraph (c) provides that in cases to which the rule is applicable

(1) 50% on the first $1000 recovered;

(2) 40% on the next $2000 recovered;

(3) 33-1/3% on the next $47,000 recovered;

(4) 20% on the next $50,000 recovered;

(5) 10% on any amount recovered over $100,000; and

(6) where the amount recovered is for the benefit of an infant or incompetent and the matter is settled without trial the foregoing limits shall apply, except that the fee on any amount recovered up to $50,000 shall not exceed 25%.

(Paragraph (e) makes it clear that attorneys are not precluded from entering into contingent fee arrangements providing for lower percentages.)

Paragraph (d) of the rule provides for computation of the contingent fee on the net sum recovered "after deducting [specified] disbursements in ...


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